Income Tax (Earnings and Pensions) Act 2003 section 194

The amount of the notional loan

Section 194 explains how to calculate the initial amount of a notional loan that arises when an employee acquires shares at an undervalue, and how that amount may be reduced over time.

• The notional loan starts at the market value of the shares as if fully paid up, reduced by any deductible amounts such as payments made at or before acquisition
• Deductible amounts also include any part of the undervalue on acquisition that has already been charged to income tax as employment income
• Amounts that count as employment income under sections 476 or 477 (relating to post-acquisition charges on shares) are also treated as deductible amounts
• If further payments are made for the shares after acquisition, the notional loan is reduced accordingly for the purposes of calculating the ongoing taxable benefit

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